What is FIRPTA?
Updated: 3 days ago
FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA)
What is FIRPTA?
It's the Foreign Investment in Real Property Tax Act of 1980. It is a tax law that applies to foreign persons who are disposing of U.S. property.
Who does FIRPTA affect?
FIRPTA affects all non-resident aliens and foreign companies not considered to be American corporations. From a taxation (tax return) standpoint, when a person who doesn't live in the United States or when a foreign corporation sells a property in the United States, they shall be subject to FIRPTA provisions.
How does it affect buyers and sellers?
At closing, the buyer must generally withhold 15% of the gross sales price and send it to the IRS within 20 days. For example, if a foreign investor sells a property for $500,000, the closing agent (the title company or attorney handling the sale) withholds $75,000. The seller then files a U.S. tax return for the year of the sale, and any amount withheld above the tax actually owed is refunded.
Lower rates apply when the buyer will live in the home: if the buyer plans to use the property as a residence, there is no withholding when the price is $300,000 or less, and the rate is 10% for prices up to $1,000,000. Above $1,000,000, the full 15% applies.
What is the difference between “withholding tax” and “tax?”
Withholding tax is the mechanism whereby the IRS forces the foreign individual or company to submit their tax return to determine if a profit or a loss resulted from the transaction.
Once the tax return is submitted and the IRS determines the amount to be charged as tax, the difference between the withholding tax and the tax is returned to the seller.
Can this withholding be avoided?
It's very important to properly plan this out to avoid negative surprises at closing. If the expected tax is lower than the withholding, the seller can apply to the IRS for a withholding certificate (Form 8288-B) to reduce the amount withheld.
Buying in your own name or through a company is one of the most important elements in the application of FIRPTA. However, the type of legal structure and the internal makeup could make a difference. On the other hand, FIRPTA is only one of the factors that should be taken into consideration, so it's extremely important you know the advantages and disadvantages of the different purchasing structures (LLC, S-Corp, Trust, Corporation, etc.).
How does it affect the buyer?
As a buyer, you should make sure the withholding tax is implemented in case the seller is a non-resident alien or a foreign company not considered a U.S. corporation. If you don't make sure it's implemented, you may be responsible for paying the taxes.
On the other hand, as a buyer, it's important to make sure you create the most effective purchasing structure to deal with this withholding tax for a future sale.
LEGAL NOTICE: The provisions of FIRPTA are complicated and require the expertise of a real estate lawyer or public accountant. They can fill out the proper forms and evaluate the possible implications. The information provided herein should not be considered a source of legal or financial advice. Please contact a professional in your area to receive information and guidance that applies to your individual situation.
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